Friday, June 15, 2012

Bank lending to small and medium-sized business has been increasing at double-digit rates for the past year, as shown in this chart of Commercial & Industrial Loans. The net increase in lending since late 2010 now amounts to an impressive $237 billion. C&I Loans are up at a 16% annualized pace over the past six months, and up 13.8% relative to a year ago.

This series continues to be a sign of improving economic and financial fundamentals. On the margin, banks are increasingly willing to lend and businesses are increasingly willing to borrow. With $1.49 trillion of bank reserves still sitting idle as "Excess Reserves" on deposit at the Fed, banks have no constraint on new lending other than their own prudence. Businesses may still feel like lending is constrained, but on the margin things are definitely getting better, and this reflects increased confidence on the part of both banks and businesses. And increased confidence, in turn, is an important ingredient for new investment and eventually new hiring and more economic growth.

Increased bank lending has also been a source of the ongoing expansion of the broad money supply. M2 is up about $1 trillion since C&I Loan growth started growing in late 2011, with almost all of that increase coming in the form of new savings deposits, whose growth still shows no signs of abating.

It's tough to find any sign here that money is in short supply or that the Fed needs to do more to promote the expansion of the money supply. The reason there is not more money circulating in the economy is that people still just want hold an awful lot of it in the form of savings deposits, even when those deposits pay almost no interest. The economy is still dominated by risk aversion, in other words, but on the margin things are getting slowly better.

12 comments:

Of course, by these measures, money has never been tight in Japan either.

Yet they have had 15 percent deflation in last 20 years, and 80 percent tumbles in equity and property markets. Industrial production has declined, and the yen has soared.

An outfit named Center for Financial Stability has a different take on the money supply, which they contend is tight. Davis Beckworth, conservative blogger, contends the ECB and the Fed have been passively tight.

I am inclined to agree with Market Monetarists, a newish rightish group of economists, who contend the Fed is being unnecessarily stodgy and timid.In general, Market Monetarists prefer fiscal austerity, but bullish monetary policies, when called for (like now).

The Japan-ECB soution---tight money and either fiscal austerity or fiscal spending---has not worked, and indeed has resulted in nations more leveraged than ever.

A nice aspect of QE is that is monetizes the debt, thus lifting debt burdens off of ourselves and children. As for QE leading to inflation---where? The last CPI was down, not up. (Okay, core was up, but hyper-inflation seems as distant as the Milky Way.)

"The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.19 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade."

From the Uneasy Money blog, another good blog.

I would say the public expects tight money now, tight money tomorrow, and tight money for another 10 years. They also do not anticipate much growth.

It is interesting to ponder---the USA has an international reserve currency, so we print money and buy goods and services with it, internationally.

The foreigners accept our cash, send us goods or services, and then invest the cash back into the USA (or buy our goods and services).

This transnational model strongly suggests the supply side is global, and practically infinite. Demand-pull inflation is very difficult to accomplish, when goods and services can cross borders easily.

The supply-side is global, and growing rapidly.

In this reality, the USA should print money aggressively. Printing more money makes a lot of sense, in this current context.

Either we get goods and services for free (the foreigners bury our money), or we get more investment in our economy, or we sell more goods and services (as is happening in US manufacturing now, with a lower exchange rate for the dollar).

Hard to see a downside to monetary bullishness.

Inflation is dead---and how can you get inflation in a global economy? If Ford wants to raise prices, in comes Kia, Hyundai, Toyota etc.

The "problem" is too much global supply, of nearly everything. It is a "problem" solved by boosting demand, and that means printing money.

The way to boost demand is not necessarily to print money, but, rather for companies to realize they are not islands and there is a limit to how much cheap labor can benefit themselves and the economy as a whole.

John said..."...but, rather for companies to realize they are not islands".

Henry Ford, when he automated the product of his Model A, outraged other industrialists of the time by paying his workers much higher wages than was customary. His mootivating idea was that by paying his workers more they would also be able to afford to purchase his cars.

This is a bit like saying " the cherries are still looking good and the crust is firm" when the inside of the cake is completely rotten. Do you think that the land of excess lives in isolation from Europe - why are the markets still so fearful, perhaps ordinary people sense that there is no way to fix this fiat currency that made only financial houses rich.

"It marked the 12th consecutive quarter in which foreigners’ purchases of US assets outweighed the opposite. Last year, net foreign investment in the US grew 14% to $234 billion.

"Recent reports don’t seem to indicate this cash is, en masse, fleeing trouble. You see, much of the capital seems to be targeting real estate....Moreover, an investment in US real estate tends to be quite illiquid and long term in nature, which doesn’t smack of a fear-based move to us.

"Manufacturing - It seems there’s fuel for continued growth in this area — while foreign acquisitions of US firms totaled about $7.5 billion in Q1, $25 billion in acquisitions have already been announced this quarter to date. In a report released earlier this year, PriceWaterhouseCoopers estimated over 21 million direct and indirect jobs are associated with foreign investment.

Banks can do nothing with excess reserves except loan them to other banks who may need required reserves. To say the excess reserves are sitting idle is very misleading. The Fed increase excess reserves through various programs but they did not add financial assets to the economy. The only entity hat can reduce excess reserves is the Fed. They have nothing to do with banks ability to lend.